Research Team at Societe Generale notes the Fed has raised federal funds target rate to 0.75-1%, but in a context of virtually unchanged economic projections, both in terms of the macro outlook and the path of the fed funds rates.

Key Quotes

“Indeed, Chair Yellen noted that the hike is not a reflection of a reassessment of the economic outlook. Instead, she flagged that the committee saw the economy progressing over the past several months exactly how it had anticipated. On the dual mandate, the Fed acknowledged progress toward its employment and inflation objectives: “Inflation has increased in recent quarters, moving close to the Committee’s 2 percent long-run objective”, although core inflation “continued to run somewhat below 2 percent” (core PCE was raised from 1.8% to 1.9% for 2017 in the summary of economic projections), and there is little change in market- and survey-based measures of inflation.”

“Risky assets cheered the ‘dovish hike’, as did Treasuries which rallied by up to 12bp with the belly of the curve leading the way. Significantly, the rates move is reflective of a dovish repricing of hike expectations with a second hike for 2017 only fully priced in at the September meeting, and a third hike priced in at 69%, just below the threshold at which the market starts showing some conviction (this versus June and December hikes fully priced in prior to the meeting).”

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